Copy of Accounting in Engineering Projects

Accounting in Engineering Projects

the financial phases from concept through startup

Accounting Based Decision Making

Cost-Benefit Analysis

...a means of evaluating all of the potential costs and revenues that may be generated if the project is completed (Investopedia)

Considerations

Financial Feasibility

- Cost to Build

- Annual Revenue

- Annual Operating Costs

- How to Make Our Screening Decision

The project meets the company's threshold, so it may proceed.

- Previous Project Capital Costs (Go-By): $80 Million

- Previous Project Operating Costs: $20 Million / year

- Company's Threshold (Hurdle Rate): 20%

- Constraints: ROI within 5 years

Let's Build a Cryogenic Air Separation Plant

Next Steps:

• Estimate and establish budget
• Approve budget
• Begin execution
• Measure periodically to ensure on target
• Capitalization

- Capital vs. Expense: This project is initiated for...

• safety, environmental, regulatory, OSHA, or PSM implications
• modifying a facility to increase efficiency or capacity, or extend useful life
• replacing an “in-kind” portion of facility, due to obsolescence, damage, or irreparable normal wear and tear

Estimate

Screen

Measure

Financial Analysis

Note. Costs represented in this figure are fictitious and do not represent actual revenues or costs associated with Air Products. Costs do not consider depreciation of assets, for the purposes of this illustration, and considers administrative overheads a part of both capital and operating costs.

Scope of Work:

• Engineer, Design, and Build a 350 Million Ton Per Day (350MM TPD) Air Separation Facility
• Supply Gaseous Oxygen and Liquefied Nitrogen to Steel Products, Inc.

Expected Revenue:

• $100 Million per Year, for 10 Years (without overhaul)

Estimating the Project

Considerations: Direct vs. Indirect Costs

Should we take on this project?

Direct Costs-

• Equipment
• Labor
• Construction Contracts
• Manufacturing Raw Materials

ACCOUNTING BASED DECISION MAKING

-Managerial Accounting for Managers: Noreen, et al.

Other Considerations

What is an ASU?

Indirect Costs-

• Selling Expenses
• Mfg. Overhead
• Admin. Overhead
• Insurance

Composition of Air

Boiling Points:

• Nitrogen: -320.4 F
• Oxygen: -297.3 F
• Argon: -302.5 F

Decision Makers should be asking:

1. What should we be selling?

2. Who should we be serving?

3. How should we execute?

• Internal Labor Rates
• Escalation / De-escalation
• Currency Hedging and Exchange Rates
• Pricing Validity
• Inflation of material and equipment costs
• Time value of money
• Net Present Value

-Managerial Accounting for Managers. Noreen, et al, p 22-23

Make or Buy?

Differential Analysis

Decision:

1. Self-fabricate the cold box

2. Outsource the cold box

Budget

Net Present Value

LIN Demo

Activity-Based Costing

Factors:

1. 3rd party has low labor rates due to minimal shop loading

2. 3rd party shop is closer to customer

3. Air Products has more expertise

4. Air Products has high quality standards

Thanks for listening...

Time Value of Money -

...a dollar today is worth more than a dollar a year from now...

A costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs...

Cap/Close

Forecast

Demo

NPV

Budget

Forecasting

Cap and Close It!

Differential Analysis

Capitalization:

• Project Complete
• Asset in service for its intended purpose
• ...to the balance sheet!

Quarterly Forecasts:

• Forecast vs. Budget
• Schedule
• Scope Changes
• Performance

The Commercial Manager receives a phone call from a steel fabricator and assembly shop.

Depreciation:

For accounting purposes, depreciation indicates how much of an asset's value has been used up. For tax purposes, businesses can deduct the cost of the tangible assets they purchase as business expenses; however, businesses must depreciate these assets in accordance with IRS rules

"Hey, we have excess capacity in our shop, and can offer very low rates!"